Snippet: Direct debits are both an efficient and potentially frustrating means of payment for consumers, with high rates of abuse in many parts of the world. In South Africa, where this kind of payment is called a “debit order”, almost a million disputes are lodged every month.

Direct debits are both an efficient and potentially frustrating means of payment for consumers, with high rates of abuse in many parts of the world. In South Africa, where this kind of payment is called a “debit order”, almost a million disputes are lodged every month. In a world-first, the South African Reserve Bank is introducing authenticated collections, a system that will disallow many direct debits that have not been electronically authenticated by consumers.

Two sides to the story

The authenticated collections system will be rolled out in phases, beginning in October, eventually replacing early debit orders (EDOs). EDOs are direct debits that take place in what is known as an “early processing window”, typically early in the morning soon after an account credit, such as a salary payment, has been made. South Africa is the only country in the world to use EDOs, which were introduced to improve payment ratios.

It is EDOs that see the greatest number of disputes – and especially a subset of them called non-authenticated early debit orders (NAEDOs), of which there are about 14 million. These use paper-based or voice-recorded mandates for authorization.

According to the Payments Association of South Africa (PASA), 7–8 percent of NAEDOs result in disputes from consumers and an incredible 18 percent remain unpaid owing to a lack of available funds – a significant concern for businesses and financial institutions.

The current system is obviously not serving either side of the transaction. The potential for fraudulent debits on an individual’s account or for a legally mandated debit order to be increased in amount without permission leaves consumers vulnerable to abuse. But the vulnerability extends to the business on the other end too, in cases where consumers request a reversal of a debit order through their bank despite it being legitimate.

Debit orders redefined

In the South African market, the solution to this problem is manifesting in the arrival of authenticated collections. These follow a similar line of thinking to two-factor authentication in online and mobile banking; they ensure that the individual whose account is being debited is alerted to the transaction beforehand. Details included in the authentication request must include the name of the company requesting the mandate, the amount, and when the amount will be debited. Once they authorize the debit, they cannot then claim not to know about it.

The mandate, once authorized, will be securely stored by the relevant bank, which will also be responsible for checking that the mandate matches the requested debit. The authentication process may take a number of forms, including use of card and PIN technology at the retailer (already in use for approximately a million authenticated early debit orders or AEDOs), an SMS, or mobile-based USSD. The latter is a proven solution to helping a wide range of income groups secure their digital banking and payments in the South African context.

Entersekt, which already leverages USSD for, among other things, authentication of card-not-present payments, welcomes this move from the Reserve Bank. With all parties moving in the right direction, and with the exciting opportunities that technology affords us, an effective, secure, and scalable solution is within reach.

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Schalk Nolte

CEO, BOARD MEMBER

As CEO, Schalk has presided over a decade of extraordinary growth at Entersekt. His passion for entrepreneurship and his relationships in key industries have aided us on our path from fintech start-up to market leader. His energy, instinct and keen focus on the fundamentals leave no room for half measures.

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Entersekt is an innovator of customer-centric fintech solutions. Financial services providers and other enterprises rely on our patented mobile identity system to provide both security and the best in convenient new digital experiences to their customers, irrespective of the service channel. With us, they can concentrate on their innovation roadmap, while delivering intuitive, low-friction digital experiences to their customers.